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State-subsidized savings accounts would be first in country
State lawmakers and bank executives are reviewing a taxpayer subsidized plan to encourage Ohioans to save money. Ohio Treasurer Richard Cordray’s plan would give Ohioans higher interest rates.
The program is meant to attract and educate new savers, and reverse a trend of increasing debt and overspending.
The savings plan calls for the state Legislature to send up to $25 million to banks across the state. In turn banks would pay higher interest rates to people who open the new savings accounts. The new plan comes on the heels of a report from the fed showing Americans have outspent savings for two straight years. Cordray says the new Ohio plan uses a surprisingly simple formula to combat that trend.
We will subsidize the banks to pay higher rates on saving deposit accounts than they would ordinarily pay, Cordray says.
Those subsidies would give savers rates of five to seven percent, which is better than typical savings account rate of one to two.
Cordray says banks around the state seem to be on board with the program. Although he declined to name names, he says he has verbal commitments from about twelve banks that are eager to participate.
They are interested, Cordray says. They’re always trying to grow their depository base, and they listen to the state since we make a lot of investments with them.
The state does do plenty of business with private banks, as do most states, but this program of state-subsidized savings accounts would be the first of its kind in country. Mike Van Buskirk is president of the Ohio Bankers League.
We give tax credits for debt in buying a home, but there are few tax advantages to savings unless you’re saving for retirement,” Van Buskirk says. “I think what the treasurer is trying to do is to make the benefit of saving a little bit more by helping increase the return over what are pretty low rates right now.
There are stipulations to the new accounts. Savers would be limited to maximum balance of five thousand dollars. They would have to attend a financial education seminar before opening the account. OSU finance professor Henrik Cronqvist says that seminar may be a deterrent for many busy consumers. Certainly if it means you have to spend a lot of time on some type of financial education program, some people will be reluctant to do that, Cronqvist says.
Cronqvist says he also has concerns about savvy investor transferring funds from existing accounts to take advantage of above-average interest rates. Van Buskirk says the chances of that are low, and even if some people did take advantage of the system, the program would still benefit lower-income savers.
“Ohioans are balancing their finances with all different kinds of pressure, Van Buskirk says. To the extent that you can dangle a carrot, make it more attractive for individuals to think of ways to set aside money to save for the future, I think it’s a positive. Especially at a time when economic conditions are tight.
The new plan must clear the state legislature before going into law. Cordray says initial talks with lawmakers have been positive, and he hopes to present them with a bill within a month.